(Bloomberg) -- As the economy improves, more Americans are changing jobs. And that means more workers leaving behind 401(k) retirement plans.
Those stranded 401(k)s create a dilemma for workers. It can be almost impossible to know whether you’re better off leaving money in an old 401(k), rolling it into a new employer’s 401(k), or rolling it over into your own individual retirement account (IRA). The problem is that figuring out 401(k) fees — the key determining factor — requires diving into oceans of fine print. Fees come in dozens of configurations, from flat annual charges to asset-based ones, and it can be exceedingly difficult to deduce whether an employees is getting the best deal.
Now, an Israeli startup named FeeX says it has a solution: an automated service that calculates the fees in an old 401(k)s and recommends whether a rollover (and which kind) makes sense. Users create an account and connect it to their old and new 401(k) plans, then FeeX calculates how much, if anything, a rollover would save.
Sometimes, FeeX data show, your money should stay sitting in an old 401(k). Large employers, in particular, often offer excellent, low-cost plans. The fees for Google’s 401(k) plan are as low as 0.07% per year. Other times, an IRA rollover will get you the exact same mutual funds at half the price. A Vanguard Group target-date fund can cost 0.43 percent per year in a 401(k), but 0.18 percent in an IRA.
Eliminating unnecessary fees is FeeX’s mission, says Chief Executive Officer Yoav Zurel. But the goal isn’t lower fees at all costs. “I’m not saying fees should not exist," he says. "People need to be paid on the job they do. The only thing I want is clarity.”
Cheap 401(k)s or mutual funds usually outperform expensive ones, but not always. Occasionally, those fees pay for advice or investing expertise that prove worthwhile. A novice investor may want someone to talk to about their retirement account. An experienced mutual fund manager is likeliest to add value in tricky parts of the markets, like emerging-market stocks.
FeeX’s service has some drawbacks. It compares your old 401(k) with several inexpensive IRAs, but the menu is limited. That’s because, while FeeX is free for users, it only features IRA providers that send it referral fees. These include a few inexpensive discount brokers, including TD Ameritrade Holding Corp. and E*Trade Financial Corp., as well as online investment advisers Wealthfront and Betterment. Zurel says this revenue doesn’t taint its recommendations. The firm is a registered investment adviser, with a legal obligation to put users’ interests first.
Another drawback isn’t really FeeX’s fault. The fees in 401(k) plans are complicated, and aren't reported in one standard way. FeeX had to build special software that combs through the fine print of fee disclosure documents. Unless an employee's 401(k) has already been evaluated by FeeX, he may need to find this document and upload it to the site. FeeX says it has fee data for 10 million 401(k) participants, and the service should get more comprehensive with time.
A simpler way to deal with old 401(k)s could give millions of workers’ retirement savings a boost. The current lack of transparency around 401(k) fees costs investors in fees, extra confusion, and wasted time. The main beneficiary, meanwhile, are firms charging for high-priced plans. “Soon the industry [will] learn that hiding information isn’t a sustainable way of making profit,” Zurel says.